Why you should care
Because deciding whether to do business as an “insider” or “outsider” can be a fateful choice.
Here amid the trendy shops and watering holes of Beijing’s trendy Sanlitun neighborhood, Charles Ezzell and Kaashiv Sampath are considering a possible future home for the restaurant they’re planning. (Think culinary fusion of the American South and the Caribbean.) The space is unfinished and strewn with bits of lumber and discarded cinder blocks, but it’s open and well-lit, and a continuous bustle of pedestrians outside bodes well for future foot traffic. It looks promising for the duo, who’ve spent six months considering everything from the specials board to the bar stools.
But before they can move ahead, they have to make a crucial decision: Go it alone as foreign owners, or tie the knot with a local Chinese partner? A joint venture could bring Ezzell and Sampath serious guanxi — connections — not to mention X-ray vision into China’s chaotic and (to outsiders, at least) often enigmatic business landscape. Assuming all went well, of course. But a soured partnership might leave their business a smoking crater, whether from simple cultural misunderstandings or something more insidious. Staying independent, meanwhile, would preserve their flexibility, but might leave them vulnerable the next time the local health department unexpectedly changes its standards.
Sure, foreign entrepreneurs around the world have to choose between playing as insiders or outsiders. But in China, where arbitrary government regulation remains pervasive, such partnerships are rising at a dramatic pace, embraced by businesses from retailers and manufacturers to restaurants and car dealerships. So too, though, are complaints by foreign entrepreneurs who feel abused or taken advantage of by their local counterparts. Indeed, a survey released this year by the consulting firm Vantage Partners found that 59 percent of joint ventures failed to meet expectations. They “are notorious for their high failure rate,” warns Dan Harris, author of China Law Blog, which discusses the country’s legal rules and how they impact business there.
Chinese joint ventures can fail for reasons like the fact that owning most of a venture doesn’t always translate into control.
Of course, business opportunities in China are like nothing most entrepreneurs have seen, even given the nation’s slowing economy. Fear of missing out is a big reason joint ventures remain stunningly popular. A whopping 76 percent of senior executives surveyed this year by advisory firm PricewaterhouseCoopers said they were planning to enter into a business partnership in China. But partners also bring a variety of risks, and not just to small businesses. In the past few years, big multinationals such as French beverage-maker Danone and the British supermarket chain Tesco have seen major joint ventures go south.
Most joint ventures stumble for exactly the reasons you’d expect — primarily bad management and poor planning, Vantage Partners found. But sometimes the problems arise when foreigners don’t check their Western business assumptions at the door. For example, owning a majority of a joint venture doesn’t always translate into control of the company, Harris points out. Chinese partners, for instance, often allow foreigners to hold 51 percent ownership of a venture in exchange for the authority to appoint senior managers — which, in practice, leaves them running the store.
And then there are the cases in which foreigners claim that Chinese partners stabbed them in the back — although unsurprisingly, these stories often get murky quickly. One of Beijing’s most lauded restaurants, Salt, suddenly closed less than two years ago amid rumors that Gaby Alves, the foreign owner, was pushed out. The restaurant reopened a couple of weeks later under the same name and in the same location — just without Alves, who released a statement claiming that her landlord and a former employee had “effectively stolen our business.” (Salt wasn’t technically a joint venture, but a wholly foreign-owned enterprise.) Alves didn’t respond to OZY requests for comment.
But Lucy Wang, the former Salt general manager accused by Alves, claims she’s the one who was left holding the bag. She says she helped secure a bank loan for Alves, who left the country with some of that money outstanding, along with unpaid rent and supplier bills. Now Wang says she’s trying to recoup some of those lost funds. She is operating the restaurant under the new(ish) name Salt Spring.
Overall, says Harris, Chinese law is much fairer to foreign investors than it used to be — for instance, when it comes to the enforcement of legal contracts. (Disputes among business partners aren’t exactly unknown in other countries, either.) And there are plenty of successful partnerships. Several years ago, Carl Setzer and Liu Fang opened Great Leap Brewing as a wholly foreign-owned enterprise within a courtyard in Beijing’s traditional hutong (alley) area. The microbrewery used to offer just four home-brewed beers, and while its representative says, “There is no easy part to having or opening a business in China,” it now boasts two additional locations in upmarket areas of the city, with some 20 beers brewed on-site.
Ezzell and Sampath, meanwhile, are still weighing the pros and cons of finding a Chinese partner. They remain enthusiastic about going ahead with their business, even as they consider tales of foreigners starting restaurants and getting stung. “We haven’t worked this hard to fall into bed with the first local partner who comes knocking,” says Sampath.